This graph is very interesting (from The New York Times). It shows the price-to-earnings ratio and gives us hope for the future as well as some relief that the bottom is not far away – if not here already. On the other hand, you can see that there is a possibility we will get to the lows of the 20’s, 30’s and 80’s – which means more pain on the way.
What explains the huge run up from the 80’s to the early 2000’s and why was this period very different from the previous ups and downs? The answer is the widespread adoption of new technologies. Some of the gains from applying technology have been overrated; however, for the most part, these gains have resulted in significant increases in productivity.
Even if you don’t follow the markets, you are impacted by them. When the market moves up (prices rising) it is a lead indicator of what we will see on the street in the not-too-distant future. What happens to stocks usually preempts what happens in the overall economy. Prices rising indicates optimism, prices falling indicates pessimism. The better the future looks, the higher the ratio of price-to-earnings will go.
You may be thinking, “Wow, sounds like the markets are run by emotion!” You are right, with the two primary emotions being fear and greed, and a diverse range in-between.
To be fair, there is more at play in the markets than emotion… There is also the data, the facts and the ratios. Emotions without facts are irrational. Facts without emotion are inaccurate or incomplete. As you can see, it takes both to be successful.
For those born in the 70’s and 80’s, this is a new experience (in the 2000’s). I was born in the 60’s, so you can see I experienced the slide down to the 80’s. The benefit of the graph is that you can look back a hundred years or so and see the repeating pattern. Which brings me to the good news: we will hit bottom and the wild ride up will begin again!
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